Futures contracts are quite similar to forward contracts (see Chapter 5), as they also are contractual agreements between two counterparties to deliver a certain security (or cash) at a predetermined time in the future and for a predetermined price, called the futures price. However, futures contracts differ from forward contracts in a few key respects:

  1. The futures contract is traded on a regulated exchange, such as the Chicago Board of Trade (CBOT) or the Chicago Mercantile Exchange (CME). The exchange defines the characteristics of the contract and it acts as a counterparty to investors who want to go long or short the contract. In addition, it also guarantees that payments will be honored at maturity, through the exchange clearinghouse.
  2. The security underlying the futures contract is standardized, in the sense that the futures contract clearly specifies the type of security that is eligible for delivery, as well as the time and the method of delivery of the security. That is, there is no room for customized requests from clients.
  3. The profits and losses are marked-to-market daily, meaning that they accrue over time to short and long traders with daily frequency.

Table 6.1 Some Futures Contracts

Futures Contract Exchange
30-year U.S. Treasury bond futures CBOT
2-, 5-, and 10-year U.S. Treasury note futures CBOT
5-, 10-, and 30-year interest rate swap futures CBOT
30 day Federal Funds ...

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